Work Package 1: Robust Asset Allocation

Lead PI: Prof. Paolo Guasoni

This work package investigates the sensitivity of asset allocation policies to the pressure that these policies generate on prices. The last decade has seen a sea change in securities trading: specialist markets have largely been replaced by limit order books, and quotes in fractions such as eights and sixteenths have made way to decimal prices. These changes have brought a ten-fold reduction in bid-ask spreads, and a three-fold increase in volume traded. The new industry of algorithmic trading has taken a central role as a provider of liquidity, but these algorithmic traders have built sophisticated filtering techniques, which detect trading patterns by large investors, and quickly react by moving prices against them. In summary, institutional investors today face lower bid-ask spreads, but higher sensitivity of prices to their own trades.